Prohibited transactions

The prohibited-transaction rules are the single most dangerous part of self-directed retirement investing, because the penalty is not a fine on the transaction, it is potential destruction of the entire account. Governed by IRC Section 4975, these rules keep you from using your retirement account to benefit yourself or your family today, rather than saving it for retirement. Cross the line, even accidentally, even for fair value, and the IRS can treat your whole IRA as distributed. Anyone holding real estate in a self-directed IRA or solo 401(k) has to understand these rules cold.

Disqualified persons: who your account cannot deal with

The rules turn on the concept of a “disqualified person,” the people and entities your account is forbidden from transacting with. The list is broad: you (the account owner), your spouse, your ascendants (parents, grandparents), your descendants (children, grandchildren) and their spouses, and any entity, LLC, corporation, trust, in which you and other disqualified persons together own or control 50% or more.

Notably, the line runs vertically through your family, not horizontally: your parents and children are disqualified, but your siblings, cousins, aunts, and uncles generally are not. That means a transaction with your brother may be permissible where the identical deal with your son is fatal. But the core idea is simple: the account must operate at genuine arm’s length from you and your immediate lineal family, as a separate financial entity that exists only to build retirement wealth.

Disqualified persons include you, your spouse, your parents and children and their spouses, and entities you control 50% or more, and your account cannot transact with any of them.

What counts as a prohibited transaction

The prohibited acts are any direct or indirect dealing between the account and a disqualified person: selling, exchanging, or leasing property; lending money or extending credit in either direction; furnishing goods, services, or facilities; or transferring or using the account’s assets for a disqualified person’s benefit.

In real estate terms, the common violations are specific and easy to stumble into. You cannot live in or vacation in the property your IRA owns, not even for one night. You cannot do repairs or renovations on it yourself, because contributing your labor is furnishing services to the account, a prohibited “sweat equity” transaction, and crucially, doing it for free does not cure it: even uncompensated services that improve the account’s position are a prohibited transfer of value. You cannot rent the property to your children or parents. You cannot buy an asset from the account or sell your own property to it, even at a fair market price, because fair pricing does not save a prohibited transaction. And you cannot personally guarantee a loan to the account. The reach is long, and courts have enforced it strictly in cases like Peek and Kellerman.

Prohibited transactions include using the property yourself, doing your own repairs even for free, renting to close family, or buying from or selling to the account, and fair pricing does not make any of them permissible.

The penalty: the whole account, not just the deal

This is why the rule is so feared. A prohibited transaction does not just tax the offending deal. The IRS can treat the entire IRA as distributed as of the first day of the tax year in which the violation occurred. That means the whole account balance becomes taxable ordinary income that year, plus, if you are under 59 and a half, a 10% early-distribution penalty on all of it. A single misstep on one property can trigger tax on an entire retirement account built over decades.

And the IRS does not distinguish between intentional and accidental violations. Good intentions, ignorance of the rule, and fair pricing are all irrelevant. There is no bright-line safe harbor investors can lean on, which is exactly why self-directed real estate demands conservative structuring, a knowledgeable custodian, and professional oversight. The cost of caution is small; the cost of a violation is the account.

A prohibited transaction can cause the entire account to be treated as distributed on the first day of the violation year, taxing the whole balance plus a possible 10% penalty, regardless of intent.

The bottom line

• Prohibited transactions under IRC 4975 bar your account from dealing with disqualified persons.
• Disqualified persons include you, your spouse, parents, children and their spouses, and controlled entities.
• You cannot use the property, do your own repairs (even free), rent to close family, or deal with the account yourself.
• Fair market pricing does not make a prohibited transaction permissible.
• A violation can cause the entire account to be treated as distributed, taxed, and penalized at once.

For the accounts these rules govern, read self-directed IRA and solo 401(k). For a strategy that must respect them, see Roth conversions. For the full picture, start at the advanced real estate tax strategies hub.

Last verified August 2026.